After GOP Bill’s Failure, Health-Law Lawsuit Takes Center Stage

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President Donald Trump and GOP lawmakers, seeking to regroup following the collapse of the effort to repeal the Affordable Care Act, have an option for gutting the health law relatively quickly: They could halt billions in payments insurers get under the law.

House Republicans were already challenging those payments in court as invalid. Their lawsuit to stop the payments, which they call illegal, was suspended as Republicans pushed to replace the ACA, but it could now resume—or the Trump administration could decline to contest it and simply drop the payments. Mr. Trump could unilaterally end the payments regardless of the lawsuit.

Such actions would stop the government payments reimbursing insurers for subsidies that lower the cost of deductibles, copayments and coinsurance for about six million people who obtain insurance on the ACA’s exchanges.

Insurers would lose billions of dollars in expected funding and would likely flee the ACA’s exchanges, a foundation of the health law where millions of people obtain coverage. Some Republicans have argued that a meltdown of the ACA could force lawmakers—particularly Democrats—back to the bargaining table.

But the path forward is unclear and insurers are pressing for a quick decision on the lawsuit as they decide whether to participate on the exchanges next year.

The subsidies “are really vital,” said Craig Garthwaite, director of the health-care program at Northwestern University’s Kellogg School of Management. “They make the insurance a much more usable product for people. They are a critical part.”

The subsidies decision crystallizes the broader dilemma facing Republicans following their failure to replace the ACA. They have the power to accomplish some of their goals by weakening the law through administrative action. But that risks a backlash from voters who lose insurance.

If the ACA implodes, Republicans say voters would blame Democrats since they enacted the ACA. Democrats say it is the GOP that would suffer if the law collapses on the Republicans’ watch because they hold unified power in Washington.

The office of House Speaker Paul Ryan (R., Wis.) didn’t respond Monday to a request for comment.

White House press secretary Sean Spicer said Monday that the Trump administration would continue seeking ways to tackle health care, including potentially working with Democrats.

“We’re not saying it’s the end of health care. We are looking for a way forward,” Mr. Spicer said. “A lot of members on both sides have reached out, not just to the president but to members of the team with ways they think would make the bill stronger.”

House Republicans filed the lawsuit seeking to block the ACA subsidies in 2014, when former President Barack Obama was still in office, asserting the payments were made without the required congressional appropriation.

The Obama administration argued the funds were made available in another part of the ACA that provided money from the U.S. Treasury for other subsidies that reduce the cost of health insurance.

A federal judge in 2016 ruled the government payments were improper but let the subsidy payments continue while an appeal was pursued. After Mr. Trump was elected, Republicans requested and received an initial delay in the case.

In February, the Trump administration and House Republicans asked for an indefinite delay, with three-month updates beginning in May, to allow time for a resolution. That could have given Congress breathing room to pass a health bill upending much of the ACA and enacting its replacement.

Following last week’s failure of Republicans to rally around a bill overturning the ACA, the lawsuit is now center stage.

The case could drag out for years. But if the Trump administration settles the suit and drops the appeal, payments would cease and insurers would likely increase premiums or abandon the exchanges. The payments would otherwise amount to roughly $130 billion from 2017 through 2026, according to the Congressional Budget Office.

If the administration ended the payments, Congress would have to approve funding if lawmakers decided they wanted the subsidies to continue. That could be a tough sell because many Republicans are still calling for the ACA to be struck down.

Mick Mulvaney, Mr. Trump’s budget director, said Sunday on NBC’s “Meet the Press” that health care will be revisited when the ACA “breaks,” adding, “Because it’s going to break. And I think that’s the one thing that folks have not started talking about yet.”

Even an uncertain prospect for the payments might be enough to spook insurers from participating in the exchanges in 2018, further imperiling the insurance marketplaces. Insurers must decide by June, or earlier in some states, whether to participate in the exchanges next year.

Funding the cost-sharing reductions is an important piece that will stabilize the markets for 2018, said Kristine Grow, a spokeswoman for America’s Health Insurance Plans, the major trade association representing insurers.

Humana Inc. has said it is leaving the exchanges and two other insurers, Molina Healthcare Inc. and Anthem Inc., have said they would consider pulling back. Some Republican senators, including Lamar Alexander and Bob Corker of Tennessee, have expressed alarm at the prospect of weakening the ACA exchanges further without a replacement plan.

The administration could continue to make the payments. The Trump administration had taken steps to help woo insurers to participate in 2018, a sign it wanted to stabilize the ACA markets and keep them functioning.

But health analysts say following the GOP’s plan’s defeat, the president could change his approach and seek to undermine the law as a way to restart negotiations. Mr. Trump said in a Saturday tweet that “ObamaCare will explode and we will all get together a great healthcare plan for THE PEOPLE. Do not worry!”

Health and Human Services Secretary Tom Price has been a critic of the cost-sharing subsidies targeted by the lawsuit.

“Trump has the ability to force Congress back to the bargaining table by ending the Democrats illegal Obamacare bailouts,” said Michael Cannon, director of health policy studies at the libertarian Cato Institute.

For insurers, the decision by the Trump administration will be the clearest signal yet on whether the president is looking to bolster the ACA or tear it down.

“It opens the door to whether they’re looking to expedite the implosion of the ACA or try to make it work,” said Larry Levitt, a senior vice president at the Kaiser Family Foundation.